Dell Cash Pile: You Can't Get To It But Michael Dell Can

by Dee GillJanuary 31, 2013

Dell’s (DELL) big cash pile has rarely helped its shareholders, mainly because the company has preferred to keep it stashed away in overseas tax havens. So it may be particularly galling to Dell shareholders that the cash is a key reason Michael Dell has attracted serious interest for his proposed leveraged buyout. After all, an LBO at or near the rumored $14 a share price would royally screw a whole lot of Dell shareholders.

In recent years, Dell has maintained a large cash pile even as it struggled with slowing demand for personal computers, its main product. Almost all of it sits in foreign bank accounts, largely in The Netherlands, where it’s excused from the U.S.’s 35% corporate income tax. Bloomberg News recently estimated that Dell avoided paying about $4 billion in income taxes since 2004 by keeping the money there instead of spending it in the U.S.

That cash helps make the company attractive to Mr. Dell’s potential LBO partners even if it can’t be repatriated without paying taxes. Vipal Monga of CFO Journal explained in a January 17 article how most of that money could be used as collateral on loans without repatriating it, effectively reducing the amount of outside cash Michel Dell or others would need to invest.

Decent free cash flow throughout the crisis also looks good to LBO investors. That money can be used to pay them interest.

This is not the sort of use most shareholders had in mind for that money. For the past few years, Dell has been touting a plan to spend money on R&D and acquisitions to move the company into higher-margin, faster-growing non-PC markets, like servers for data centers. Dell has made some small acquisitions but not enough to offset its PC problems in the near future.

Also, there have long been calls for Dell to use its cash, either by repatriating it or as collateral on loans, to buy back shares from whatever shareholders want out. The LBO plan has highlighted the feasibility of such a plan; the financial markets apparently have a quite genuine interest in lending money to Dell. Dell did agree to start paying a quarterly dividend last year, which now yields about 2.4%.

Of course, shareholders won’t care what they do with the cash if the buyout price is right. But the possible price of $13 to $14.25 per share (a $22 billion to $24 billion deal) reported by Reuters and others aren’t likely to make many of them happy.

Having your business decisions publicly criticized and challenged is perhaps a bothersome side effect of taking the public’s money, and it’s not surprising that Michael Dell has grown weary of this aspect of his job. But it’s not particularly clear why he can make Dell a more successful as a private company than a public one. It would be interesting to see what he would do differently with Dell’s money when different investors are involved.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.